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Redeemable Preferred Stock as Equity

In a recent discussion memorandum, Distinguishing between Liability and Equity Instruments and Accounting for Instruments with Characteristics of Both, the FASB addressed the issue of whether redeemable preferred stock is debt or equity.

Required:
Present arguments in favor of presenting redeemable preferred stock as equity. Your arguments should take into consideration definitions of the elements of financial statements in SFAS No. 6 and any other relevant aspects of the conceptual framework, as well as implications regarding the usefulness of financial statement information to investors.

Solution Preview

FASB 149 and Redeemable Preferred Stock Current initiatives are likely to affect the balance sheets of private equity and venture-backed companies. Proposed FASB 149, crafted in the wake of Enron, WorldCom and similar scandals, will establish rules for determining when financial instruments must be classified as liabilities rather than equity on a company's balance sheet. Specifically, the proposal creates three new categories of instruments that are presently characterized as equity in most circumstances, but under FASB 149 will be characterized as liabilities.

One of these categories is ...

Solution Summary

This solution presents and describes preferred stock and its appropriate classification on the balance sheet

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